There are five critical areas an SBA lender considers in detail when deciding whether to underwrite an SBA loan. These five areas are Cash-flow, collateral, credit, management experience and liquidity. If you plan to apply for an SBA loan make sure you consider each of these areas. You don’t need to be perfect in all these areas but if you are weak in one area you will need to be so much stronger in another.

Let’s have a look at each of these in a little more detail.

1. Cash-Flow
This is one of the most important areas. The lender is using a concept called Debt Service Coverage (DSC.) In simple terms, the lender wants to know that the business is producing enough positive cash flow to service the costs to run the business, provide an adequate income to the buyer so they can pay their personal bills and feed the family etc plus service the debt that will be incurred if a loan is approved. To use some numbers to provide a specific example, if the buyer of the business wanted to make an SBA loan that required an annual loan payment of $100,000 for the loan only, the bank would want to see the business generate a positive cash flow over and above all expenses to run the business of at least $120,000 per annum or at a Debt Service Coverage ratio of 1.2.

When deciding whether to lender money to the buyer of a business, the SBA lender analyzes the tax returns for all the businesses in which the borrower(s) owns 20% or more and the living expenses of each borrower and any sources of income.

All this information is considered within the time frame of at least the last three years so the SBA lender will need the buyer to provide 3 years of tax returns plus interim financial statements that are less than 90 days old.

2. Collateral
As the banks are primarily concerned with risk management, to protect the loan they may extend to the buyer, they look for collateral to take to support the loan. Collateral is simply an asset on standby the bank can take and seller if the borrower defaults on the loan.
When determining how much collateral is available, banks discount the property because they rarely get 100% of its value if the property is foreclosed upon. These reasons include that payments are usually in arrears, they will incur costs to sell the property such as agents and attorney’s etc. Typical discounts are 20% for residential properties and 20% for commercial real estate.

Additionally, banks view properties ranging from easy-to-sell to difficult-to-sell. For example, factors that make properties harder to sell are: a) location, such as the property being in an outlying area, b) condition, might be old or not kept up, c) type, might be single purpose or raw land.

3. Credit
The credit of the borrower is important to the SBA lender. However, other areas of the business loan application need to be strong if the buyer’s credit report is poor. For example, if the business cash flow and collateral are strong, poor credit can often be overcome. If either of these areas are weak, however, the credit history becomes increasingly important.
Some banks focus on FICO scores, while others want to focus on the explanations to determine how much weight to give to credit issues. If you are thinking of applying for a loan to finance the purchase of a business, before you start looking for a business to buy, check your credit report and history are in order in case there are errors and you can therefore correct them.

4. Management Experience
In recent years, this area has become more and more important to the SBA lenders. Recent analysis of why business buyers failed showed that a lack of management experience in an industry was contributing factors. If the business buyer has not previously owned or managed a business in a particular industry may lead to a quick loan decline. Conversely, a buyer with the requisite management experience has shown the lenders that the owner has a greater chance to maintain revenues/profits at historical levels.

5. Liquidity
A business buyer needs to have a certain amount of money in cash to buy a business. The bank doesn’t want a hard asset used that needs to be sold so it’s critical that initial down payments be in cash. A borrower can borrow their down payment but this new loan payment must be factored into the analysis. Also keep in mind that different if you borrowing for a construction project, it may require even more liquidity to ensure the project’s completion. Finally, start-up businesses require significant savings to fall back upon and in the current economy are very difficult to finance.

Successfully applying for an SBA loan requires planning, attention detail, perseverance and follow up.

If you are looking to sell or purchase a business, you need the right professional advice for your situation and from someone that’s done it before. If you have questions or need more information, visit my website at or send me an email at

Author's Bio: 

Andrew is a 5-time business owner and his expertise includes helping owners sell and/or buyers purchase a business, new entrepreneurs buy a franchise, certified machinery and equipment appraisals and business valuations. His credentials include the CBI designation from the IBBA and the CBB from the CABB. Andrew is also a published author on four books on buying or selling a business available at